The No-Growth Meetings

My conversations with investors on the margins of the IMF/World Bank meetings shows a broad anxiety about growth. Europe is first on the list of concerns, along with a slowdown in China and US fiscal drag. You would think that it would be easy, therefore, to produce G-7 and G-20 communiques that were pro-growth and highlighted the need for countries to act where they have the space. Apparently, that’s not the case, with the key players as divided as ever.

The U.S. Government continues to press for accomodative policies, focusing fire on Europe, while broadly endorsing recent measures in Japan. Its hard to criticize a Japanese program that also promises fiscal and structural reform and is justified on domestic growth grounds. Thus, notwithstanding their statements last week that they would continue to monitor yen movements and oppose any country talking down its currency, concern about yen depreciation (so far) will be set aside for now.

Conversely, Germany and the other "austerians" stress the need for countries to adhere to planned consolidation measures. There is no sense of any self-doubt here.

Finally, while China’s public statements acknowledging the possible benefits of Japan’s policy shift have dampened talk of currency wars, they likely will lead an emerging market press for more explicit warnings against competitive depreciation.

The IMF hasn’t helped. Christine Lagarde’s speech highlighting "three-speed growth" in the global economy was a nice rhetorical framework for the meetings. The three speeds include countries (primarily emerging markets) that are doing well and need to focus on structural policies for long-term growth, a group that includes the United States that is doing ok and on the mend but can do better, and a low growth group (notably Europe) that need more ambitious policies. And today she had a forceful pro-growth message to open the meetings. But in their other communications the Fund has sent mixed messages, at times signalling that the degree of fiscal restraint in Europe is about right, that the pace of rebalancing is appropriate, and that growth prospects are improving. It also must not make the U.S. Government happy that the early headline from the Fund is about excessive fiscal consolidation in...the United States. True enough, but not the lead they wanted. Controversy about the validity of work by Rogoff and Reinhart on the growth cliff once countries exceed 90 percent of GDP in debt probably doesn’t help either.

Bottom line, we are likely to get a muddied message this weekend in which countries will see validation in their own policies, a defacto endorsement of the status quo. Not much more could have been expected, but hardly a comforting message for investors worried about where growth will come from.